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A Four-Step Financial Guide to Your 20s

Get on the road to financial success before you reach age 30.

By Stacy Rapacon

September 13, 2010

I recently celebrated my 29th birthday. Well, “celebrated” might be an overstatement considering that being this close to hitting 30 gives me a bit of a fright. Don’t get me wrong -- I don’t think of myself as old (claims that 40 or 50 is the new 30 remind me that this is an attractive age to be). But my next birthday is undoubtedly a milestone that will commemorate a more official entrance into adulthood -- complete with all the daunting responsibilities.

So, before I hit my three-decade mark, I want to review four important steps we should all take in our twenties to grow up and reach financial glory. And if you can suggest any other tips (or you just want to wish me a happy birthday), please do so in the comment box below.

1. Find your career path. Obviously, having a source of income tops this checklist. But by the time you hit 30, you need more than just a job that pays the bills; you ought to have a career, or at least be on track to get one.

If you’re still in school, remember that, as much fun as college may be, your primary reason for being there is to prepare yourself for gainful employment. Make sure you learn some marketable skills before graduation day (excellence at “flip cup” does not count) and hone those skills throughout your twenties. This doesn’t mean everyone has to study accounting, business administration or computer science, which are among the majors most likely to land you a job right out of college, according to the National Association of Colleges and Employers. For example, I earned a B.A. in English -- often (and I’d say unfairly) dubbed a “useless degree.” But I complemented the comprehensive reading and writing skills I learned from my major with additional coursework in math, statistics and economics. Put that all together and ta-da: I’m now happily starting my career as a personal-finance writer.

If you’re already working, are you in a field you can picture yourself continuing in for the next three, five, ten and 20 years? If not, you need to start looking for a career that works for you. (Just don’t jump plane the Steven Slater way – see Quit Your Job the Smart Way.) Here are a baker’s dozen worth of choices: 13 Careers for the Next Decade.

Once you get started in your choice career, figure out the track you want to follow. What’s the next step up from your current position? How long has it typically taken others to get there? What salary and benefits come with that role? Of course, as this recent recession taught many of us, no matter how well you plot your career path, you may be forced to take some detours. Still, knowing your desired destination will certainly help you navigate through those difficult times.

2. Build an emergency fund. As a responsible adult, you should abide by the same motto as any good Girl or Boy Scout: Be prepared. In case the unexpected happens, you should always have enough cash on reserve to cover at least three to six months’ worth of expenses. Keep it in a regular savings account, where you’ll have easy access to your funds. You can search BankRate.com for the accounts currently offering the best rates. For example, American Express Bank’s high-yield savings account currently yields 1.3% per year and has no minimum balance or monthly fees. See How Much Cash You Really Need for more about emergency funds.

3. Create a plan to repay your debt. I won’t pressure you to pay off everything you owe before you turn 30. After all, according to Sallie Mae, college graduates left school in 2008 with an average credit-card debt of $4,100, up from about $2,900 in 2004. And 10% of that same graduating class also carried $40,000 or more in student debt, according to the Project on Student Debt, an advocacy group.

But if you’re buried under student loans or crippled by credit-card debt, you need to at least figure out how to tackle it before you turn 30. “With cleaning up debt issues, the most important thing is to have a plan and not just assume it’ll go away,” says Carlo Panaccione, a certified financial planner based in Redwood Shores, Cal. Often, Panaccione encounters people who count on a big future bonus or bump in salary to pay off large debts. “Well, that may never happen,” he says. A better strategy: Set up a schedule and figure out how much you’ll need to pay each month to clear the debt by your target date. For more information on paying off school loans, see Digging Out of Student Debt.

4. Start funding a retirement account. Most people don’t start planning for such long-term goals until they’ve reached their forties, says Panaccione, “and then they panic-save later on.” Gentle readers, be the tortoise: Choose the chill path to savings and take advantage of this 20-year head start. Even if you can afford to put away only a small amount each month, slow and steady can win big.

For example, if you start saving just $150 a month at age 25, assuming an 8% return, you’ll wind up with $527,142 by the time you turn 65. Waiting an extra five years to start saving will cost you $180,766. Even if you crank your savings up to $200 a month starting on your 30th birthday, you’ll only net $346,376 by 65. And if you wait until you’re 40 to start saving $200 a month, you’ll have just $191,473 when you’re 65. Crunch your own numbers with our 401(k) calculator.

Ideally, you’ll want to save much more for retirement -- about 10% to 15% of your income would be best. But exactly how much you’ll need depends on what kind of lifestyle you’re planning for your golden years. For help figuring out a dollar amount, try our Retirement Savings Calculator.

The best place to build your retirement account would be in a 401(k) or a Roth IRA. Both vehicles offer appealing tax advantages, but the employer-sponsored 401(k) may also score you free money if your boss makes a contribution, too. To find out more about these types of accounts, see Why You Need a 401(k) Right Away and Why You Need a Roth IRA.

Delta Project, which studies postsecondary education costs and spending. Schools would muddle through by slashing budgets and raising tuition. “Now we’ve got a triple whammy,” she says: Revenues and spending at unsustainable levels and a president who wants to increase the number of postsecondary degrees attained each year. To meet Obama’s goal for the population aged 24 to 35 alone would require 15 million degrees above what’s likely at the current pace.

Growing a Fund Portfolio

Learn how funds work and how to set up a well balanced portfolio that's right for you.

August 2007

In this tutorial you'll learn how funds work and how to select the right funds for your goals. We've also included tips on record keeping and tackling your taxes. Finally, you can look over examples of well balanced portfolios of good performing funds in Kiplinger's portfolio picks.

Why Mutual Funds?Funds offer plenty of benefits for busy investors. Here's a quick review of how they can work for you.

Adapted from Kiplinger’s Practical Guide to Your Money, by the Editors of Kiplinger’s Personal Finance magazine (Kaplan Publishing. Copyright 2005 The Kiplinger Washington Editors, Inc.) Available wherever books are sold or direct at kiplinger.com/store/books.

It's Never Too Late for a Roth IRA

EDITOR'S NOTE: This article was originally published in the July 2010 issue of Kiplinger's Retirement Report.

OUR READERWho: Bill Segur, 60Where: Wilmington, N.C.Question: I've finally paid off my mortgage. What should I do with the extra cash?

Now that they've paid off their home loan early, Bill is wondering how he and his wife, Susan, should use the extra $600 a month. Bill is a registered nurse at a hospital and hopes to retire in a few years. He wants to maximize what he and Susan (also an RN) are socking away while they're still working. So their focus is on adding to their savings kitty.

Bill and Susan, 54, figure they have three options. They can increase their contributions to their 403(b) and 401(k) retirement plans, add more to their established traditional IRAs, or start up Roth IRAs. Bill appreciates the tax advantages of a Roth. Although there is no upfront tax break, all withdrawals, including investment earnings, are tax-free once you are 59 1/2 and the account has been open at least five years.

But Bill wonders whether it makes sense for him and Susan to open Roths at their age. "At this late date in our work experiences, do we start new Roth IRAs or add to our traditional accounts?" he asks. The couple have an adequate emergency savings fund and little debt, so they can comfortably bulk up their retirement assets.

Carlo Panaccione, a financial planner in Redwood City, Cal., says that Bill and Susan should pat themselves on the back for paying off their mortgage and committing to put the money toward savings rather than going on a spending spree. "People always say: "If I have money left at the end of the year, I'll save it,'" says Panaccione. "It never happens." Instead, he says, household budgets simply tend to expand whenever a family has money to spare.

Tax advantages. So, to answer Bill's question directly: It's not too late to start a Roth IRA. Because both Bill and Susan are older than 50 and their joint income is less than $167,000, each of them can contribute the maximum $6,000 (including $1,000 in catch-up contributions) to a Roth in 2010.

No matter how long you maintain the retirement account, the tax benefits of a Roth are simply too good to pass up. When you withdraw money from a 401(k) or a regular IRA, it's taxed at your ordinary income-tax rate. With a Roth, you can withdraw cash in retirement without paying Uncle Sam a penny.

And once Bill and Susan retire, they won't need to tap their Roth IRAs right away, given their modest living expenses, their income from workplace retirement plans and Social Security. Because Roths have no required-minimum-distribution rules, you can leave the investments in place as long as you like. "That money can just sit there and cook," says Larry Rosenthal, a financial planner in Manassas, Va. With income-tax rates likely to rise to offset growing budget deficits, the Roth stands out as an increasingly valuable tax shelter. In other words, it's a good way for the couple to diversify their future tax liability.

Roth accounts could also prove helpful to Bill and Susan's estate planning. They can leave the accounts to their two daughters, who would inherit them tax-free.

Details and Disclosures

Annual Percentage Yield (APY) is accurate as of August 1, 2015 - August 31, 2015 and is subject to change at any time. Fees may reduce earnings.

Rates are subject to change monthly and are fixed for the term of the certificate. Certificates dividends compound daily. The minimum balance to open a certificate is $1,000.

*Note that any IRA Certificates opened or renewed prior to September 1, 2007, can be redeemed before maturity without a penalty, if the Member is at least 59 1/2 years old. A penalty will be imposed for early redemption of an IRA Certificate that was opened or renewed after September 1, 2007, regardless of the member's age. This fee could reduce your earnings.

Early Redemption Penalties

Penalties are imposed for early withdrawal of IRA certificates. You must provide your request in writing.

Certificates having a term of 1 year or greater up to and including 4 years

If redeemed within 180 days of the issue date or any renewal date, all dividends will be forfeited

If redeemed thereafter, but before the maturity date, dividends for the most recent 180 days will be forfeited.

Certificates with a term of 5 years or greater(applies only to certificates issued or rolled over on 3/15/11 or later)

If redeemed within 365 days of the issue date or any renewal date, all dividends will be forfeited.

If redeemed thereafter, but before the maturity date, dividends for the most recent 365 days will be forfeited.

This credit union is federally insured by the National Credit Union Administration. Rates are current as of August 2015 unless otherwise noted and are subject to change. APY = Annual Percentage Yield APR = Annual Percentage Rate

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